An Estimated Small Open Economy Model of the Financial Accelerator

By Alejandro Justiniano Espigares, Selim A Elekdag, Ivan Tchakarov

March 1, 2005

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Format: Chicago

Alejandro Justiniano Espigares, Selim A Elekdag, and Ivan Tchakarov. An Estimated Small Open Economy Model of the Financial Accelerator, (USA: International Monetary Fund, 2005) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper develops a small open economy model where entrepreneurs partially finance investment using foreign currency denominated debt subject to a risk premium above and beyond international interest rates. We use Bayesian estimation techniques to evaluate the importance of balance sheet vulnerabilities combined with the presence of the financial accelerator for emerging market countries. Using Korean data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, our estimates of the Taylor rule imply a strong preference to smooth both exchange rate and interest rate fluctuations.

Subject: Exchange rate arrangements, Exchange rates, Financial statements, Labor, Return on investment

Keywords: Interest rate, Risk premium, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/044
Stock No:

WPIEA2005044
ISBN:

9781451860634
ISSN:

1018-5941

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